Institutional Federal Compliance Report 2021

Custodial Credit Risk Investment securities are exposed to custodial credit risk if the securities are uninsured, are not registered in the name of the government and are held either by: (a) the counterparty or (b) the counterparty’s trust department or agent but not in the government’s name. The risk is that the State will not be able to recover the value of its investments or collateral secu- rities that are in the possession of an outside party if the counterparty fails. The State’s policy is to hold all of its investments in the State’s name; however, the investments listed below are exposed to custodial credit risk because they are not held by the State but are held by a public benefit corporation in the public benefit corporation’s name or administered by a fiscal agent on behalf of New York State. The following table presents the amortized costs which approximates fair value of investments by type (amounts in millions): 68 • Notes to Basic Financial Statements __________________________________________________________________________ Foreign Currency Risk The State Finance Law, Section 98-a, does not expressly permit investment in foreign currency and there is no formal policy related to foreign currency; however, the College Savings Plan has certain underlying mutual funds which invest in foreign securities. There are certain additional risks involved when investing in foreign securities that are not inherent with invest- ments in domestic securities. These risks may involve foreign currency exchange rate fluctuations, adverse political and economic developments, and the possible prevention of currency exchange or other foreign gov- ernmental laws or restrictions. In addition, the liquidity of foreign securities may be more limited than that of domestic securities. Fair Value

GASB Statement No. 72, Fair Value Measurement and Application (GASBS 72), establishes a three-level val- uation hierarchy of fair value measurements. This valuation hierarchy is based on observable and unob- servable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions and other inputs subject to management judgment. These inputs are incorporated in the following fair value hierarchy: Level 1 inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets that a government can access at the measure- ment date. Level 2 inputs are inputs—other than quoted prices included within Level 1—that are observ- able for an asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for an asset or liability. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. If the fair value of an asset or a liability is mea- sured using inputs from more than one level of the fair value hierarchy, the measurement is considered to be based on the lowest priority. The State’s Level 1 investments in mutual funds and equity securities are reported at fair value using prices quoted in active markets for those securities. The Level 2 mutual funds, Treasury investments, municipal bonds, government-sponsored agency bonds, equity securities and debt securities are reported at fair value using quoted prices for similar assets or quoted prices for identical items that are not actively traded.

Investment Type

Fair Value

Government-sponsored agency bonds . . . . $ U.S. Treasury bills . . . . . . . . . . . . . . . . . . . . U.S. Treasury notes . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

1,833 655 369 2,857

Interest Rate Risk The fair values of the State’s fixed-maturity investments fluctuate in response to changes in market interest rates. Increases in prevailing interest rates generally translate into decreases in fair values of those instru- ments. Fair values of interest-rate-sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, relative values of alternative investments, the liquidity of the instrument and other general market conditions. The State manages its interest rate risk by limiting the majority of its investments to a maturity structure of one year or less. Additionally, the State holds its investments to maturity, which minimizes the occur- rence of a loss on an investment. The State’s investments in mutual funds and equity securities have no stated maturity and have not been allocated to a time period on the preceding table. Concentration of Credit Risk Concentration of credit risk is the risk of loss attributed to the magnitude of the State’s investment in a single issuer (which may not exceed 5 percent or more of total investments). To mitigate this risk, it is the policy of the State to maintain a diversified portfolio among a variety of investment instruments in which it is legally permitted to invest.